“A true planetary emergency,” is how Al Gore described global warming at a congressional hearing in March. “A lucrative business opportunity disguised as an environmental problem,” is how energy guru Amory Lovins characterized climate change in The Atlantic magazine. Or is it both? Clearly, business leaders need to understand how climate change and, perhaps even more importantly, how likely policy responses to climate change will affect their businesses.
Science of Global Warming
So first the science. What do climatologists know? In February, the United Nations’ Intergovernmental Panel on Climate Change (IPCC) issued its 4th Assessment Report Summary for Policymakers. The summary declares that “warming in the climate system is unequivocal” and that “most of the observed increase in globally averaged temperatures since the mid-20th century is very likely due to the observed increase in anthropogenic greenhouse gas concentrations.” Very likely means that IPCC scientists believe that there is more than a 90 percent chance that the last half century of warming is humanity’s fault.
Climatologists think that humanity is responsible for global warming because the amount of greenhouse gases, chiefly carbon dioxide released by burning fossil fuels, has increased over the past two centuries. The concentrations have increased from a preindustrial value of about 280 to 379 ppm in 2005. The atmospheric concentration of carbon dioxide in 2005 exceeds by far the natural range over the last 650,000 years (180 to 300 ppm) as determined from ice cores. The globe’s average temperature has increased by about 0.76 deg. C (about 1.4 deg. F) since 1850. The result is that mountain glaciers and snow cover have declined on average in both hemispheres, and sea level is rising. The IPCC projects sea level rise by 2100 could be between 18 to 59 centimeters (7 to 23 inches).
In April, the IPCC released a summary looking at the impacts, opportunities for adaptation and vulnerabilities associated with climate change. That report noted that nearly 90 percent of the more than 29,000 observational data series derived from 75 studies show significant change in many physical and biological systems consistent with the direction of change expected as a response to warming. In particular, the report noted that growing seasons are lengthening, animals and plants adapted to cooler temperatures are shifting their ranges poleward, and birds are migrating earlier.
The impacts summary also noted that over the next century higher temperatures will likely increase droughts in semi-arid regions such as the American Southwest, the Sahel in Africa, and southern Europe. In addition, melting mountain glaciers will reduce summer water flows in many water-stressed regions.
The above is some of the fairly well settled scientific information about the impacts of global warming. In public discourse, however, a lot of claims suggest catastrophic consequences. For example, the website for Al Gore’s Oscar-winning film, An Inconvenient Truth, warns, “We have just 10 years to avert a major catastrophe that could send our entire planet into a tailspin of epic destruction involving extreme weather, floods, droughts, epidemics and killer heat waves beyond anything we have ever experienced.” According to the IPCC findings, Gore’s fears are exaggerated. Let’s take each in turn.
It is true that the IPCC projects that both droughts and more intense rain storms will occur as the world warms. But Gore’s biggest concern is coastal flooding as a result of sea level rise. He dramatically shows that if all the ice in Greenland melted, sea level would rise by 20 feet and Florida, Shanghai and New York City would be inundated. Gore asked viewers to imagine the impact of 100 million refugees fleeing relentlessly rising seas.
But the IPCC’s worst-case scenario projects sea level could rise by as much as 23 inches over the 21st century. That’s not insignificant, but hardly 20 feet. What’s more, a study by Oregon State University geoscientists concluded if temperatures rose steeply that the Greenland ice sheet might melt away in 500 to 1,000 years.
Even extreme weather is not the slam dunk that Gore implies. A consensus statement from the World Meteorological Organization in December 2006 declared, “Though there is evidence both for and against the existence of a detectable anthropogenic signal in the tropical cyclone climate record to date, no firm conclusion can be made on this point.” In fact, a new study published in April of this year by climatologists at the University of Miami in Florida noted that global warming could intensify upper level winds, producing wind shear that could decapitate hurricanes-making them weaker, not stronger.
Gore argues that global warming may change the ranges of some insects that carry disease, especially mosquitoes. As proof, he points to the arrival of the West Nile virus (WNV) in the U.S. WNV is a mosquito-borne virus that first appeared in New York City in 1999, apparently somehow arriving from Israel. It is spreading across the country, carried by birds on which mosquitoes feast. But WNV is not a tropical disease; it can be found throughout Europe, Central Asia and Africa. WNV took hold here not because of increases in global temperatures, but because, as with malaria, cholera and dengue before it, an appropriate carrier finally made it across the Atlantic.
Gore also noted the heat wave that hit Europe in 2003, killing some 35,000 people with temperatures topping 104 deg. F. But historically, such temperatures are not unknown in Europe. In July 1921, temperatures reached 104 deg. F in Strasbourg, France. Furthermore, Danish statistician Bjorn Lomborg estimates that while 200,000 Europeans die each year from excess heat, 1.5 million die from exposure to cold. A 2006 study by European economists projects that warmer temperatures in 2050 will actually lead to 170,000 fewer deaths annually in the U.S. and Europe.
Economics of Warming
In October 2006, the British government issued the Stern Review on the Economics of Climate Change, which argued that climate change could cause global economic devastation equivalent to a world war or the Great Depression. The report, compiled by former World Bank economist Nicholas Stern, cheerily concluded that humanity will only have to spend the equivalent of 1 percent of GDP to avert the looming catastrophe. Stern makes his case by combining worst case climate model predictions with worst case economic model predictions. The predictable result is disaster 100 years hence.
Most economists reject Stern’s conclusions because he used an absurdly low discount rate of 0.1 percent. Yale University economist William Nordhaus pointed out that such a low discount rate implies that we should spend $1 trillion today in order to avoid a reduction in post-2200 income of 0.01 percent from climate change. In fact, using a normal discount rate of 4 percent, Nordhaus’ colleague Robert Mendelsohn has calculated that the aggregate net impacts of climate change for the globe are surprisingly small for the next century. “The full range of scenarios suggests damages from -0.13 percent of GDP to benefits of 0.02 percent of GDP,” writes Mendelsohn. He adds, “These estimates are more than an order of magnitude smaller than many estimates in the literature that predict impacts of 1 to 2 percent of GDP.” Even the IPCC thinks that fixing climate change will be cheap. Its May report on the costs of mitigation estimates that it will take only 0.12 percent of global GDP per year between now and 2030 to prevent dangerous climate change.
Regarding intergenerational equity, Nordhaus calculates that even accepting Stern’s assumptions, global warming would reduce average annual incomes in 2200 from $94,000 to only $81,000. So should people living today with world average incomes of $7,800 per year sacrifice in order to ensure that future generations make $94,000 instead of $81,000 per year?
Although there remain serious uncertainties about the magnitude of the human role in climate change, there is a growing consensus that greenhouse gas emissions need to be reduced. The battle now is over how. The two leading approaches are carbon markets and carbon taxes. Surprisingly, a great many free marketers favor higher taxes on carbon-emitting fossil fuels over a cap-and- trade carbon market, including former Federal Reserve chairmen Paul Volcker and Alan Greenspan, N. Gregory Mankiw, former chairman of President George W. Bush’s Council of Economic Advisers, and former Duke Energy CEO Paul Anderson. A Wall Street Journal survey published this past February found that 54 percent of economists favor a carbon tax over other approaches.
Business leaders see the policy handwriting on the wall and are rushing to help shape the emerging greenhouse gas (GHG) emissions regulatory scheme to their own best advantage. In January, the U.S. Climate Action Partnership, consisting of 10 companies with a total market capitalization of $750 billion, including DuPont, Alcoa, General Electric and BP America, issued a “blueprint for a mandatory economy- wide, market-driven approach to climate protection.”
While carbon taxes are preferred by many policy intellectuals, proposals for carbon markets dominate Capitol Hill. These envision the creation of cap-and-trade market schemes for reducing the emissions of greenhouse gases. For example, Senator John McCain, a leading Republican candidate for president, said in February that “any responsible climate change measure must have rational, mandatory emission reduction targets and timetables,” and it “must utilize a market-based, economy-wide €˜cap-and- trade’ system.”
McCain is a co-sponsor, with Senator Joe Lieberman, of the Climate Stewardship Act, which would establish a nationwide limit on greenhouse gas emissions and then issue permits to emit greenhouse gases. The McCain-Lieberman bill ambitiously aims to cut greenhouse gas emissions by almost 60 percent below what they would otherwise have been in 2030. Companies that have low emissions could sell their emissions allowances to companies that find it expensive to reduce their own emissions.
However, implementing a cap-and-trade carbon market has proven difficult. The European Union created a continent-wide carbon market to fulfill its obligation under the Kyoto Protocol to reduce its GHG emissions by 8 percent below its 1990 emissions. In May 2006, the carbon market collapsed because EU governments had issued far more permits for emissions than actual emissions. In October 2006, all of the European Union countries forwarded their proposed national allocation plans for carbon dioxide emissions to the European Commission. It turns out that they allocated permits allowing emissions 15 percent higher than current emissions. As EC environment commissioner Stavros Dimas warned, “If member states put more allowances into the market than are needed to cover real emissions, the scheme will become pointless, and it will be difficult to meet our Kyoto targets.”
In order to prevent the permanent collapse of the EU’s carbon market, Dimas is currently trying to persuade EU members to scale back their proposed emissions allocations. The problems with the European Union Emissions Trading Scheme highlight the fact that governments have every incentive to cheat by issuing enough permits to keep energy costs low for domestic businesses and thus give them an advantage over their foreign competitors. If it is difficult for European countries to fairly allocate and police permits among themselves, think how much harder it will be to do among all the countries in the world.
Yale economist Nordhaus favors harmonized carbon taxes that are more easily administered and monitored on a global basis than cap-and-trade systems. Also, a harmonized tax offers relative price stability; the tax on carbon emissions can be raised gradually and predictably over time so that governments, industries and consumers all see what the price of carbon-based fuels will be over future decades and make investment and purchase decisions accordingly. Prices in pollution markets can be very volatile; the price of sulfur dioxide emissions permits in the U.S. has ranged between $70 to $1,550 per ton.
Nordhaus argues that a harmonized carbon tax can be far more transparently administered across the globe than emissions limits. There is less opportunity to cheat. If a county chooses not to impose pollution taxes on emitters, other countries can boost their tariffs on exports from that country as a way to encourage it to join the harmonized climate tax regime.
One major objection to a pollution tax is that it does not explicitly set a limit on emissions. However, if it turns out that people believe that it is really necessary to cut greenhouse gas emissions by 70 percent, it will be possible to keep increasing the tax until the price incents people to conserve or switch to alternative sources.
Taxpayers might accept carbon taxes if they are used to reduce their payroll tax burdens. “The great political advantage of carbon taxes is that they raise large revenues that governments can use to reduce other unpopular and more distorting taxes or finance popular spending programs,” says Robert Shapiro, former undersecretary of commerce for economic affairs under former President Clinton.
Nordhaus suggests the optimal carbon tax trajectory balancing costs and benefits would start with a tax of about $17 per ton of carbon, rising to $84 in 2050 and $270 in 2100. Economist Paul Portney, former president of the Resources for the Future think tank, proposes starting with a $5 per ton tax on carbon and raising it by $5 per ton every other year. The first year would raise $9 billion in revenues for the Treasury, rising to $25 billion by 2010 and $75 billion by 2020. A $25 per ton carbon tax translates into a 5 percent increase in average electricity rates and a boost of about 6 cents per gallon of gasoline.
As the end of the Bush Administration approaches, few doubt that the U.S. will start limiting its greenhouse gas emissions after 2008. The question is how best to do it-carbon markets or carbon taxes? How this important debate is resolved will affect how Americans live, work and invest for the rest of the 21st century.
Ronald Bailey is science correspondent for Reason magazine .